The Great Recovery – Unambiguous Clarity Over The Horizon

Are you a grasshopper or a weed hopper? A subscriber recently chided me for succumbing to that which I deride the very most, the dreaded groupthink. So ubiquitous is the consensus on the economic outlook for 2018, I’d been swept away on a wave of conforming concordance. What followed was, “You surprise me weed hopper.”

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In the spirit of discovery, I must admit to being a bit mystified. I was familiar with ancient Asian teachings that raise the grasshopper to esteemed status. To wit, grasshoppers “overcome obstacles, jump into successful ventures and are forward thinkers. A grasshopper’s nature is stable, vibrant, content, intuitive, patient, peaceful, creative, insightful, connected, courageous, resourceful, and much more.”

A weed hopper, on the other hand, references one who is new to the scene to the art of smoking weed or a small aircraft which uses tricycle landing gear and a tubular-frame fuselage. True confessions, the scent of marijuana is all that’s needed to induce a wave of nausea for this one. And I’m a bad flier.

But maybe that was the point. Perhaps I needed to be reminded of the importance of nuance. Had I just accepted “weed hopper” as a synonym for “grasshopper,” wouldn’t that have proven the point that I’d stopped discerning and begun to take others’ thoughts as my own?

And then there’s the very source of groupthink, the Federal Reserve, though we can hope the times, they are a changing. For the here and now, a veteran and voter on this year’s Federal Open Market Committee continues to voice concerns over worryingly low inflation. That’s what happens when you suffer from the worst form of myopia that keeps you focused on a failed inflation gauge. What this unnamed Fed official should have said was what a fellow grasshopper, Dr. Gates, pointed out in reaction to this inside-the-box thinking: “What the Fed should be concerned about is tightening the economy into a recession because the cost to buy what we must (non-discretionary) is rising at an appreciably faster pace than the cost to splurge on what we covet (discretionary).”

Price pressures for necessities are running too hot, not too cold. That applies to companies and households alike, by the way. Pick your poison – a margin squeeze or further strain on household budgets.

In the meantime, rampant commodity inflation continues to pressure yields upwards. As if the bloodletting needed reinforcements, this week’s bond market rout has intensified care of the two largest foreign holders of Treasuries. The Bank of Japan appears to be, denials notwithstanding, tapering its quantitative easing (mechanics matter). And China is making rumblings about the reduced attractiveness of holding our sovereign bonds with the added punctuation point that the risk of a trade war gives them more license to pull back.

And so, the two-year/ten-year Treasury spread gaps out by 10 basis points and there’s Bill Gross and his bond market peers of the world who angst (talk their books) about the end to the glorious bond market mega-run that’s been around for most of our careers.

Are you surprised the stock market is taking all of this in stride? If you answered in the affirmative, all I can say is, “You surprise me weed hopper.” In the meantime, in the real economy, it’s full steam ahead, something the Fed will follow, come what may. For more on the economy’s prospects this year and beyond, please enjoy this week’s installment The Great Recovery: Unambiguous Clarity Over the Horizon.

With hopes you are a grasshopper, and wishing you well,

Danielle

 



About the Author

Danielle DiMartino
Called "The Dallas Fed's Resident Soothsayer" by D Magazine, Danielle DiMartino Booth is sought after for her depth of knowledge on the economy and financial markets. She is a well-known speaker who can tailor her message to a myriad of audiences, once spending a week crossing the ocean to present to groups as diverse as the Portfolio Management Institute in Newport Beach, the Global Interdependence Center in London and the Four States Forestry Association in Texarkana. Danielle spent nine years as a Senior Financial Analyst with the Federal Reserve of Dallas and served as an Advisor on monetary policy to Dallas Federal Reserve President Richard W. Fisher until his retirement in March 2015. She researches, writes and speaks on the financial markets, focusing recently on the ramifications of credit issuance and how it has driven equity and real estate market valuations. Sounding an early warning about the housing bubble in the 2000s, Danielle makes bold predictions based on meticulous research and her unique perspective honed from years in central banking and on Wall Street. Danielle began her career in New York at Credit Suisse and Donaldson, Lufkin & Jenrette where she worked in the fixed income, public equity and private equity markets. Danielle earned her BBA as a College of Business Scholar at the University of Texas at San Antonio. She holds an MBA in Finance and International Business from the University of Texas at Austin and an MS in Journalism from Columbia University. Danielle resides in University Park, Texas, with her husband John and their four children. In addition to many volunteer hours spent at her children's schools, she serves on the Board of Management of the Park Cities YMCA.